Notes
to the Financial Statements
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Organization
GulfSlope
Energy, Inc. (the “Company” or “GulfSlope”) is an independent oil and natural gas exploration company
whose interests are concentrated in the United States Gulf of Mexico federal waters offshore Louisiana. The Company has leased
14 federal Outer Continental Shelf blocks (referred to as “prospect,” “portfolio” or “leases”)
and licensed three-dimensional (3-D) seismic data in its area of concentration.
(b)
Basis of Presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) and the instructions to Form 10-K and Regulation S-X published by the US Securities and Exchange Commission
(the “SEC”). The accompanying financial statements include the accounts of the Company.
(c)
Going Concern
The
Company’s financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred
net losses through September 30, 2018 of $41.9 million, has a lack of cash on-hand not from joint interest owners, and a
working capital deficit. These factors raise substantial doubt as to the Company’s ability to continue as a going
concern. Management intends to raise additional operating funds through equity and/or debt offerings. Management also plans
to extend the agreements associated with loans from related parties, the accrued interest payable on these loans, as well as
the Company’s accrued liabilities. However there can be no assurance that additional financing will be available, or
if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may
be required to curtail or cease operations or the Company would need to sell assets or consider alternative plans up
to and including restructuring.
(d)
Cash
The
Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or
less to be cash equivalents. There were no cash equivalents at September 30, 2018 and 2017, respectively.
(e)
Accounts Receivable
The
Company records an accounts receivable for operations expense reimbursements due from joint interest partners. The Company
estimates allowances for doubtful accounts based on the aged receivable balances and historical losses. If the Company
determines any account to be uncollectible based on significant delinquency or other factors, it is immediately written off.
As of September 30, 2018 and 2017, no allowance was recorded. Accounts receivable from joint operations are $6.7 million at
September 30, 2018.
(f)
Full Cost Method
The
Company uses the full cost method of accounting for its oil and gas exploration and development activities. Under the full cost
method of accounting, all costs associated with successful and unsuccessful exploration and development activities are capitalized
on a country-by-country basis into a single cost center (“full cost pool”). Such costs include property acquisition
costs, geological and geophysical (“G&G”) costs, carrying charges on non-producing properties, costs of drilling
both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities.
Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a
sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs.
A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool.
Proved
properties are amortized on a country-by-country basis using the units of production method (“UOP”), whereby capitalized
costs are amortized over total proved reserves. The amortization base in the UOP calculation includes the sum of proved property,
net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs (future
costs to access and develop proved reserves), and asset retirement costs, less related salvage value.
The
costs of unproved properties and related capitalized costs (such as G&G costs) are withheld from the amortization calculation
until such time as they are either developed or abandoned. Unproved properties and properties under development are reviewed for
impairment at least quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements
to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic,
and market conditions. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred
to proved properties immediately upon determination that a well is dry and amortized accordingly. In countries where a reserve
base has not yet been established, impairments are charged to earnings.
Companies
that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform
a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10. The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the
first day of the month for the preceding twelve month period. The cost center ceiling is defined as the sum of (a) estimated future
net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c)
the lower of cost or market value of unproved properties included in the cost being amortized. If such capitalized costs exceed
the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down
will reduce earnings in the period of occurrence and results in a lower depreciation, depletion and amortization rate in future
periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase
the ceiling.
As
of September 30, 2018, the Company’s oil and gas properties consisted of unproved properties, wells in process and no proved
reserves.
(g)
Property and Equipment
Property
and equipment are carried at cost and include expenditures for new equipment and those expenditures that substantially increase
the productive lives of existing equipment and leasehold improvements. Maintenance and repair costs are expensed as incurred.
Property and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives. Fully depreciated
property and equipment still in use are not eliminated from the accounts.
The
Company assesses the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash
flows, expected to be generated from such assets, to their net book value. If net book value exceeds estimated cash flows, the
asset is written down to its fair value, determined by the estimated discounted cash flows from such asset. When an asset is retired
or sold, its cost and related accumulated depreciation and amortization are removed from the accounts. The difference between
the net book value of the asset and proceeds on disposition is recorded as a gain or loss in our statements of operations in the
period in which they occur.
(h)
Income Taxes
Deferred
tax assets and liabilities are recognized for the temporary differences between the financial reporting basis and tax basis of
the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.
A valuation allowance is provided if, based on the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company’s policy is to recognize potential interest and penalties
accrued related to unrecognized tax benefits as a component of income tax expense.
(i)
Stock-Based Compensation
The
Company records expenses associated with the fair value of stock-based compensation. For fully vested and restricted stock grants,
the Company calculates the stock based compensation expense based upon estimated fair value on the date of grant. For stock warrants
and options, the Company uses the Black-Scholes option valuation model to calculate stock based compensation at the date of grant.
Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in
these assumptions can materially affect the fair value estimate.
(j)
Stock Issuance
The
Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services
at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable.
(k)
Earnings per Share
Basic
earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of
common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include stock
options, warrants, convertible notes and restricted stock. The number of potential common shares outstanding relating to
stock options, warrants, and restricted stock is computed using the treasury stock or if-converted method. As the Company
has incurred losses for the years ended September 30, 2018 and 2017, the potentially dilutive shares are anti-dilutive and
thus not added into the EPS calculations. As of September 30, 2018 and 2017, there were 213,089,281 and 164,345,443
potentially dilutive shares, respectively.
(l)
Use of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
(m)
Impact of New Accounting Standards
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU replaces most existing revenue recognition guidance. ASU 2014-09 will be effective for us October 1, 2018. Once implemented,
the Company can use one of two retrospective application methods for prior periods. The Company has completed its evaluation of
the provisions of this standard and concluded that the adoption will not result in any adjustment to beginning accumulated deficit
as the Company does not have any revenues. The Company will adopt this new standard effective October 1, 2018 using the modified
retrospective method of adoption as permitted by the standard. The adoption of Topic 606 will have no material impact on our financial
position, results of operations, stockholders’ equity, or cash flows, but will impact disclosures when the Company has revenue.
On
February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. T
he
new guidance establishes the principles to report transparent and economically neutral information about the assets and
liabilities that arise from leases. The new guidance is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, and early application is permitted for all organizations. The Company
has not yet selected the period during which it will implement this pronouncement, and it is currently evaluating the impact
the adoption of ASU 2016-02 will have on its financial statements.
The Jumpstart Our Business Startups Act, or JOBS
Act, provides that an emerging growth company can take advantage of the extended transition period for complying with new or
revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. However, the Company has elected not to take advantage of
such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates
on which adoption of such standards is required for non-emerging growth companies.
The
Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect
on the Company’s financial statements.
NOTE
2 – LIQUIDITY/GOING CONCERN
The
Company has incurred accumulated losses as of September 30, 2018 of $41.9 million, and has a net capital deficiency. Further losses
are anticipated in developing our business, and there exists substantial doubt about the Company’s ability to continue as
a going concern. As of September 30, 2018, the Company had $5.6 million of unrestricted cash on hand, $4.5 million of this amount
is for the payment of joint payables from drilling operations. The Company estimates that it will need to raise a minimum of $8
million to meet its obligations and planned expenditures through December 2019. The Company plans to finance operations and planned
expenditures through equity and/or debt financings and/or farm-out agreements. The Company also plans to extend the agreements
associated with all loans, the accrued interest payable on these loans, as well as the Company’s accrued liabilities. There
are no assurances that financing will be available with acceptable terms, if at all. If the Company is not successful in obtaining
financing, operations would need to be curtailed or ceased
or the Company would need to sell assets or consider alternative
plans up to and including restructuring.
The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
3 – OIL AND NATURAL GAS PROPERTIES
In
January 2018, the Company entered into a strategic partnership with Delek Group Ltd. (“Delek”), and Texas
South Energy, Inc. (“Texas South”) (collectively, the “Parties”) and executed a participation
agreement for a multi-phase exploration program. Under the terms of the Agreement, the Parties have committed to drill the
Company’s “Canoe” and “Tau” prospects (the “Initial Phase”) with Delek having the
option to participate in two additional two-well drilling phases and a final, three-well drilling phase (collectively,
the “Phases”). In each Phase, Delek will earn a 75% working interest upon paying 90% of the exploratory
costs associated with drilling each exploratory well. The Company will retain a 20% working interest while paying 8% of the
exploratory costs associated with drilling each well. The Company will be required to fund 20% of any well costs in excess of 115%
of budget. In addition, Delek will pay the Company approximately $1.1 million in
cash for each Prospect when the respective exploration plan is filed with BOEM. Also, each Party will be responsible for
their pro rata share (based on working interest) of delay rentals associated with the Prospects. The Company will be the
Operator during exploratory drilling of the Prospect, however, subsequent to a commercial discovery, Delek will have the
right to become the Operator. Delek will have the right to terminate this Agreement at the conclusion of any drilling Phase.
Delek will also have the option to purchase up to 5% of the Company’s common stock, par value $0.001 per share (the
“Common Stock”), upon fulfilling its obligation for each Phase (maximum of 20% in the aggregate) at a price per
share equal to a 10% discount to the 30-day weighted average closing price for the Common Stock preceding the acquisition.
This option will expire January 8, 2020.
The
Company will assign an eight-tenths of one percent of eight/eights net profits interest in certain of the Company’s oil
and gas leases to include Vermilion Area, South Addition 378, Ship Shoal Area, South Addition 336, and Ship Shoal Area, South
Addition 351, to Hi-View Investment Partners, LLC (“Hi-View”) in consideration for oil and gas consulting services
provided pursuant to a non-exclusive consulting engagement dated October 25, 2017, by and between Hi-View, the Company, and Texas
South (the “Advisory Agreement”). Hi-View will be entitled to additional assignments on the same terms and conditions
as described above related to any of the Leases whereby Delek elects to participate in drilling of an exploratory well. In addition,
the Company issued an aggregate of eighty million shares of Common Stock to Hi-View in consideration for oil and gas consulting
services provided in facilitating the Delek farm out agreement. The value of the shares of $4.8 million determined using the share
price on March 29, 2018, the date the shares were owed to Hi-View per the agreement which was the date of the funding obligation
of the first well, was capitalized to unproved properties.
The
Company, as the operator of two wells being drilled in the Gulf of Mexico, has incurred tangible and intangible drilling costs
for the wells in process and has billed its working interest partners for their respective shares of the drilling costs to date.
The first of the two wells has been drilled and is being evaluated. The second well was spud in September 2018 and is currently
being drilled.
The
Company paid $376,368 in gross annual lease rental payments to the BOEM for the year ended September 30, 2017. The Company’s
share of these amounts are included in unproved properties.
In August 2017, the Company
competitively bid on one block in the Central Gulf of Mexico Lease Sale 249 conducted by BOEM. The Company was the high bidder
on the block and paid $26,398, which represents 20% of the total lease bonus amount. On September
29, 2017 t
he
Company’s bid was accepted. After payment in October 2017 of $140,591, which represents the remaining 80% lease bonus and
first year rentals, the Company was awarded the lease block in October 2017.
In
August 2017, the Company entered into a letter agreement with Texas South that sets out the terms of an agreement for the Company’s
Tau prospect. In exchange for $166,989, Texas South acquired an undivided 20% interest in the prospect. In accordance with full
cost requirements, the Company recorded the proceeds from the transaction as an adjustment to the capitalized costs of its oil
and gas properties with no gain or loss recognition.
In
October 2017, the Company executed the second amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of Gulfslope’s interest in two prospects for $329,062.
On
January 1, 2018, the Company executed the third amendment to the March 2014 farm-out agreement with Texas South under which Texas
South acquired 20% of GulfSlope’s interest in two prospects for $225,000.
For
the year ended September 30, 2017, the Company incurred $172,094 in consulting fees, salaries and benefits, $195,127 in stock
option costs associated with geoscientists, and $53,014 associated with technological infrastructure and third party hosting services.
As these G&G costs relate to specific company-owned unevaluated properties, the Company capitalized these G&G costs to
unproved properties.
For the year ended September 30, 2018, the Company incurred $229,267 in consulting fees, salaries and benefits
associated with geoscientists, $820,877 in stock option costs associated with geoscientists and engineers, $53,934 associated
with technological infrastructure and third party hosting, and $138,729 in capitalized acquisition costs. The Company capitalized
these G&G costs to unproved properties.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following as of September 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Office equipment and computers
|
|
$
|
133,089
|
|
|
$
|
143,897
|
|
Furniture and fixtures
|
|
|
16,280
|
|
|
|
16,280
|
|
Leasehold improvements
|
|
|
5,756
|
|
|
|
4,054
|
|
Total
|
|
|
155,125
|
|
|
|
164,231
|
|
Less: accumulated depreciation
|
|
|
(140,339
|
)
|
|
|
(160,747
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
14,786
|
|
|
$
|
3,484
|
|
Depreciation
is computed on a straight-line basis over the estimated useful lives of the assets, which were as follows:
|
Life
|
Office equipment and computers
|
3 years
|
Furniture and fixtures
|
5 years
|
Leasehold improvements
|
Shorter of 5 years
or related lease term
|
Depreciation
expense was $4,724 and $20,804 for the years ended September 30, 2018 and 2017, respectively.
NOTE
5 – INCOME TAXES
The
provision for income taxes consists of the following as of September 30, 2018 and 2017:
|
|
|
9/30/2018
|
|
|
|
9/30/2017
|
|
FEDERAL
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
STATE
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
TOTAL PROVISION
|
|
$
|
—
|
|
|
$
|
—
|
|
The
difference between the actual income tax provision versus tax computed at the statutory rate is as follows for the years ended
September 30, 2018 and 2017, respectively:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Expected provision (based on statutory
rate of 21% in 2018 and 15% in 2017)
|
|
$
|
(553,714
|
)
|
|
$
|
(854,152
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
Increase in valuation allowance
|
|
|
2,696,631
|
|
|
|
732,562
|
|
Non-deductible expense
|
|
|
53,493
|
|
|
|
121,590
|
|
Rate change
|
|
|
(2,305,270
|
)
|
|
|
—
|
|
Other, net
|
|
|
108,860
|
|
|
|
—
|
|
Total actual provision
|
|
$
|
—
|
|
|
$
|
—
|
|
On
December 22, 2017, the President of the United States (“the President”) signed into law the tax bill commonly referred
to as the “Tax Cuts and Job Act” (“TCJA”), significantly changing federal income tax laws. According to
ASC section 740, “Income Taxes,” a company is required to record the effects of an enacted tax law or rate change
in the period of enactment, which is the date the bill is signed by the President and becomes law.
The TCJA did not have
a significant impact on the financial statements as the change in the deferred income tax assets and liabilities was fully offset
by a change in the valuation allowance.
The
Company does not have any material uncertain tax positions. The Company’s policy is to recognize interest and penalties
accrued related to unrecognized tax benefits as a component of income tax expense (benefit). For the years ended September
30, 2018 and 2017, the Company did not recognize any interest or penalties, nor did we have any interest or penalties accrued
as of September 30, 2018 and 2017 relating to unrecognized benefits. Deferred income tax assets and liabilities at September
30, 2018 and 2017 consist of the following:
|
|
9/30/2018
|
|
|
9/30/2017
|
|
DEFERRED TAX ASSETS (LIABILITIES)
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
7,131,636
|
|
|
$
|
5,611,276
|
|
Exploration costs
|
|
|
(1,503,472
|
)
|
|
|
(931,289
|
)
|
Oil and natural gas leases
|
|
|
2,192,654
|
|
|
|
691,336
|
|
Stock based compensation
|
|
|
411,287
|
|
|
|
138,278
|
|
Accrued interest and expenses not paid
|
|
|
271,190
|
|
|
|
246,360
|
|
Derivative financial instrument
|
|
|
(57,059
|
)
|
|
|
—
|
|
Differences in book/tax depreciation
|
|
|
13,573
|
|
|
|
7,215
|
|
Net deferred tax asset
|
|
$
|
8,459,809
|
|
|
$
|
5,763,176
|
|
Valuation allowance
|
|
|
(8,459,809
|
)
|
|
|
(5,763,176
|
)
|
NET DEFERRED TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s valuation allowance increased $2,696,633 during the year ended September 30, 2018 and $732,562 during the
year ended September 30, 2017.
At
September 30, 2018, the Company had approximately $34.0 million of NOLs, 95% of which will expire from 2032 to 2037. All of the
Company’s NOLs are allowable as a deduction against 100 percent of future taxable income since they were generated prior
to the effective date of limitations imposed by the TCJA.
The
tax years ended September 30, 2015 through 2018 are open for examination for federal income tax purposes and by other major taxing
jurisdictions to which we are subject.
NOTE
6 – RELATED PARTY TRANSACTIONS
During
April through September 2013, the Company entered into convertible promissory notes whereby it borrowed a total of $6,500,000
from John Seitz, its current chief executive officer. The notes are due on demand, bear interest at the rate of 5% per annum,
and are convertible into shares of common stock at a conversion price equal to $0.12 per share of common stock (the then offering
price of shares of common stock to unaffiliated investors). In May 2013, John Seitz converted $1,200,000 of the aforementioned
debt into 10,000,000 shares of common stock, which shares were issued in July 2013. Between June of 2014 and December 2015, the
Company entered into promissory notes whereby it borrowed a total of $2,410,000 from Mr. Seitz. The notes are not convertible,
due on demand and bear interest at a rate of 5% per annum. During January through September 2016, the Company entered into promissory
notes whereby it borrowed a total of $363,000 from Mr. Seitz. The notes are due on demand, bear interest at the rate of 5% per
annum, and the outstanding principal and interest is convertible at the option of the holder into securities issued by the Company
in a future offering, at the same price and terms received by unaffiliated investors. Additionally, during the year ended September
30, 2017, the Company entered into promissory notes with John Seitz whereby it borrowed a total of $602,500. The notes are due
on demand, bear interest at the rate of 5% per annum, and the outstanding principal and interest is convertible at the option
of the holder into securities issued by the Company in a future offering, at the same price and terms received by unaffiliated
investors. As of September 30, 2018 and September 30, 2017 the total amount owed to John Seitz, our CEO, is $8,675,500. There
was a total of $1,641,086 and $1,201,286 of unpaid interest associated with these loans included in accrued interest within our
balance sheet as of September 30, 2018 and 2017, respectively.
From
August 2015 through February 2016 the Company entered into promissory notes whereby it borrowed a total of $267,000 from Dr. Ronald
Bain, its former president and chief operating officer, and his affiliate ConRon Consulting, Inc. These notes are not convertible,
due on demand and bear interest at the rate of 5% per annum. As of September 30, 2018, the total amount owed to Dr. Bain and his
affiliate was $267,000. There was a total of $42,706 and $27,171 of accrued interest associated with these loans included within
our balance sheet as of September 30, 2018 and 2017, respectively. In June of 2016, Dr. Ronald Bain also entered into a $92,000
convertible promissory note with associated warrants under the same terms received by other investors
(see Note 7).
On
November 15, 2016, a family member of the CEO, a related party, entered into a $50,000 convertible promissory note with associated
warrants under the same terms received by other investors (see Note 7).
Domenica
Seitz CPA, related to John Seitz, has provided accounting consulting services to the Company. During the years ended September
30, 2018 and 2017, the services provided were valued at $23,660 and $32,625, respectively. The Company has accrued these amounts
within accrued expenses and other payables, and they have been reflected in the September 30, 2018 and 2017 financial statements.
John
Seitz has not received a salary since May 31, 2013, the date he commenced serving as our CEO and accordingly, no amount has been
accrued on our financial statements.
NOTE
7 – NOTES PAYABLE
Between
June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing Notes”) with
associated warrants in a private placement to accredited investors for total gross proceeds of $837,000. Three of the notes
were to related parties for proceeds totaling $222,000, including the extinguishment of $70,000 worth of related party
payables. The convertible notes had a maturity of one year (prior to extension), bear an annual interest rate of 8% and can
be converted at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will
automatically convert if a qualified equity financing of at least $3 million occurs before maturity and such mandatory
conversion price will equal the effective price per share paid in the qualified equity financing. In addition to the
convertible notes, the investors received 27.9 million warrants (7.4 million to the above mentioned related parties) with an
exercise price of $0.03 and a term of the earlier of three years or upon a change of control. The Company evaluated the
various financial instruments under ASC 480 and ASC 815 and determined no instruments or features represented embedded
derivatives. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the convertible notes
and warrants based on their relative fair values. This resulted in an allocation of approximately $452,000 to the warrants
and approximately $385,000 to the convertible notes. After such allocation, the Company evaluated the conversion option to
discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible
notes to the fair value of the shares they are convertible into. The Company concluded a beneficial conversion feature
existed and measured such beneficial conversion feature at approximately $385,000. Accordingly, the debt discount associated
with these notes was approximately $837,000. Such discount was amortized using the effective interest rate method over the
term (one year) of the convertible notes.
Upon
maturity of eight of the eleven promissory notes in June 2017, the Company issued 3,225,000 extension warrants with an
exercise price of $0.03 per share (equal to 25% of the original warrant amount) to the holders of the notes to extend the
terms to January 15, 2018. The Company evaluated this modification including considering the fair value of the warrants
issued and concluded that extinguishment accounting was required as the present value of future cash flows from the new note,
including the fair value of the warrants issued to extend, exceeded the present value of future cash flows of the old note by
more than 10%. The fair value of the warrants was deemed to be approximately $51,000 and such amount was recognized
immediately as a loss on extinguishment of debt. The fair value of the warrants was determined using the Black-Scholes option
pricing model. In July and August 2017, the three remaining promissory notes issued in July, August and November 2016 were
extended until January 15, 2018 and issued 3,750,000 extension warrants (equal to 25% of the original warrant amount). The
Company evaluated this transaction including considering the fair value of the warrants issued and concluded that
modification accounting was required as the present value of future cash flows from the new note, including the fair value of
the warrants issued to extend, was less than 10% of the present value of future cash flows of the old note. When an
instrument is modified, any incremental increase in value (in this case the warrants) should be added to the discount of the
notes and such discount should be amortized to interest expense using the effective interest rate method over the new
remaining life of the note. The fair value of the warrants, approximately $39,000, was determined using the Black-Scholes option pricing
model.
Upon
revised maturity of the eleven promissory notes on January 15, 2018, the Company issued 2,790,000 extension warrants with an
exercise price of $0.10 per share (equal to 10% of the original warrant amount) to the holders of the notes to extend the
term to April 16, 2018. The Company evaluated this transaction including considering the fair value of the warrants issued
and concluded that extinguishment accounting was required as the present value of future cash flows from the new note,
including the fair value of the warrants issued to extend, exceeded the present value of future cash flows of the old note by
more than 10%. The fair value of the warrants was deemed to be approximately $217,000 and such amount was recognized immediately as a loss
on extinguishment of debt. The fair value of the warrants was determined using the Black-Scholes option pricing model. In
June 2018, the maturity date of all of the notes was extended to January 15, 2019.
For
the year ended September 30, 2018, the amortization of the discounts associated with the Bridge Financing Notes was
approximately $30,000. Six of the Bridge Financing Notes with a principal balance of $560,000 plus accrued interest
of $86,525 were converted during the year ended September 30, 2018. The remaining note balance at September 30, 2018 is
$277,000. See Note 9 for a summary of the warrants outstanding relating to the Bridge Financing Notes.
On
December 28, 2016, the Company issued a convertible promissory note (together with the convertible promissory notes
issued below, the “Financing Notes”) with 500,000 shares of restricted stock and 550,000 warrants in a private
placement to an accredited investor for $50,000 in proceeds. The warrants have a five year term and an exercise price of
$0.10. The promissory note has a face value of approximately $56,000, which includes 10% original issue discount
(“OID”) and incurs a one-time upfront interest charge of six percent. The holder of the note has the option to
convert the note into shares of common stock at a conversion price of $0.02 per share. Approximately $450,000 of additional
funding is available under similar terms if the Company and the lender mutually agree to further tranches. The Company
evaluated the various financial instruments under ASC 480 and ASC 815 and determined no material instruments or features
represented embedded
derivatives. Therefore, in accordance with ASC 470-20-25-2, the Company allocated the proceeds between the
convertible note, restricted common stock, and warrants based on their relative fair values. This resulted in an allocation
of approximately $8,000 to the restricted stock, approximately $8,000 to the warrants and approximately $34,000 to the convertible note. After such allocation, the
Company evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the
effective exercise price of the convertible note to the fair value of the shares it is convertible into. The Company
concluded a beneficial conversion feature existed and measured such beneficial conversion feature at approximately $34,000. Accordingly, at
December 28, 2016, the debt discount associated with these notes was approximately $56,000. Such discount was amortized using the effective
interest rate method over the term (seven months) of the convertible note. For the year ended September 30, 2017 amortization
of this discount totaled $56,000 and is included in interest expense in the statement of operations. The note, related OID and accrued interest were converted into approximately
5.5 million shares of GulfSlope Energy common stock in a series of conversions beginning on July 10, 2017 and ending with
a conversion on September 18, 2017 on which date all were paid in full.
On
March 14, 2017, the Company issued a convertible promissory note with 1,000,000 shares of restricted stock and 1,100,000 warrants
in a private placement to an accredited investor for $100,000 in proceeds. The warrants have a five-year term and an exercise
price of $0.10. The promissory note has a face value of approximately $111,000, which includes 10% original issue discount (“OID”),
and incurs a one-time upfront interest charge of six percent. The holder of the note has the option to convert the note into shares
of common stock at a conversion price of $0.02 per share. Approximately $350,000 of additional funding is available under similar
terms if the Company and the lender mutually agree to further tranches. The Company evaluated the various financial instruments
under ASC 480 and ASC 815 and determined no material instruments or features represented embedded
derivatives. Therefore, in accordance
with ASC 470-20-25-2, the Company allocated the proceeds between the convertible note, restricted common stock, and warrants based
on their relative fair values. This resulted in an allocation of approximately $17,000 to the restricted stock, approximately $14,000 to the warrants and
approximately $69,000 to the convertible note. After such allocation, the Company evaluated the conversion option to discern whether a beneficial
conversion feature existed based upon comparing the effective exercise price of the convertible note to the fair value of the
shares it is convertible into. The Company concluded a beneficial conversion feature existed and measured such beneficial conversion
feature at approximately $69,000. Accordingly, at March 14, 2017, the debt discount associated with these notes was approximately $111,000. Such discount
will be amortized using the effective interest rate method over the term (seven months) of the convertible note. For the year
ended September 30, 2017 amortization of this discount totaled approximately $106,000 and is included in interest expense in the statement of
operations. In September 2017, $30,000 was converted
into 1.5 million shares of stock, leaving a note balance of $81,111 at September 30, 2017. The remaining balance and accrued interest
were converted in October 2017 at which time all was paid in full.
On
October 16, 2017, the Company issued a convertible promissory note with 1,000,000 shares of restricted stock and 1,100,000 warrants
in a private placement to an accredited investor for $100,000 in proceeds. The warrants have a five-year term and an exercise
price of $0.10. The promissory note has a face value of $110,000, which includes 10% original issue discount (“OID”),
and incurs a one-time upfront interest charge of six percent. The holder of the note has the option to convert the note into shares
of common stock at a conversion price of $0.02 per share. Approximately $250,000 of additional funding is available under similar
terms if the Company and the lender mutually agree to further tranches. The Company evaluated the various financial instruments
under ASC 480 and ASC 815 and determined no material instruments or features represented embedded
derivatives. Therefore, in accordance
with ASC 470-20-25-2, the Company allocated the proceeds between the convertible note, restricted common stock, and warrants based
on their relative fair values. This resulted in an allocation of approximately $21,000 to the restricted stock, approximately $20,000 to the warrants and
approximately $59,000 to the convertible note. After such allocation, the Company evaluated the conversion option to discern whether a beneficial
conversion feature existed based upon comparing the effective exercise price of the convertible note to the fair value of the
shares it is convertible into. The Company concluded a beneficial conversion feature existed and measured such beneficial conversion
feature at approximately $59,000. Accordingly, at October 16, 2017, the debt discount associated with these notes was $110,000. Such discount
was amortized using the effective interest rate method over the term (seven months) of the convertible note. In April 2018
the note and accrued interest was converted into 5.8 million shares of common stock and paid in full.
On
December 15, 2017, the Company issued a convertible promissory note with 1,000,000 shares of restricted stock and 1,100,000 warrants
in a private placement to an accredited investor for $100,000 in proceeds. The warrants have a five-year term and an exercise
price of $0.10. The promissory note has a face value of $110,000, which includes 10% original issue discount (“OID”),
and incurs a one-time upfront interest charge of six percent. The holder of the note has the option to convert the note into shares
of common stock at a conversion price of $0.02 per share. Approximately $150,000 of additional funding is available under similar
terms if the Company and the lender mutually agree to further tranches. The Company evaluated the various financial instruments
under ASC 480 and ASC 815 and determined no material instruments or features represented embedded
derivatives. Therefore, in accordance
with ASC 470-20-25-2, the Company allocated the proceeds between the convertible note, restricted common stock, and warrants based
on their relative fair values. This resulted in an allocation of approximately $28,000 to the restricted stock, approximately $27,000 to the warrants and
approximately $45,000 to the convertible note. After such allocation, the Company evaluated the conversion option to discern whether a beneficial
conversion feature existed based upon comparing the effective exercise price of the convertible note to the fair value of the
shares it is convertible into. The Company concluded a beneficial conversion feature existed and measured such beneficial conversion
feature at approximately $45,000. Accordingly, at December 15, 2017, the debt discount associated with these notes was $110,000. Such discount
was amortized using the effective interest rate method over the term (seven months) of the convertible note. In June 2018
the note and accrued interest was converted into 5.8 million shares of common stock and paid in full.
See
Note 9 for a summary of the warrants outstanding relating to the Financing Notes.
NOTE
8 – Fair Value Measurement
Fair
value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following
categories:
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
GulfSlope considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency
and volume to provide pricing information on an ongoing basis.
|
Level
2:
|
Quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability. This category includes those derivative instruments that GulfSlope values using observable
market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument,
can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
Instruments in this category include non-exchange traded derivative financial instruments as well as long-term incentive plan
liabilities calculated using the Black-Scholes model to estimate the fair value as of the measurement date.
|
Level
3:
|
Measured
based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable
from objective sources (i.e. supported by little or no market activity).
|
Financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may
affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Fair
Value on a Recurring Basis
The
following table sets forth by level within the fair value hierarchy GulfSlope Energy, Inc.’s liabilities that were accounted
for at fair value on a recurring basis as of September 30, 2018 (no financial assets or liabilities were accounted for at fair
value on a recurring basis as of September 30, 2017):
|
|
|
Fair Value Measurements Using
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total Carrying
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value as of
|
|
|
|
|
(In thousands)
|
Derivative Financial Instrument
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
Total as of Total as of September 30, 2018
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
|
$
|
—
|
|
|
$
|
(271,710
|
)
|
During
the years ended September 30, 2018 and 2017, the Company did not have any assets or liabilities measured at fair value on a non-recurring
basis.
NOTE
9 - COMMON STOCK/PAID IN CAPITAL
At
our annual shareholder meeting in May of 2018 our shareholders approved increasing the number of authorized shares of common stock
from 975,000,000 to 1,500,000,000. The number of authorized shares of preferred stock was not changed and is 50,000,000.
As
discussed in Note 7, during the year ended September 30, 2016, the Company issued 26.2 million warrants in conjunction with
the Bridge Financing Notes. The warrants have an exercise price of $0.03 and a term of the earlier of 3 years or upon a
change of control. In November 2016, the Company issued 1.7 million warrants in conjunction with the Bridge Financing Notes.
The warrants have an exercise price of $0.03 and a term of the earlier of 3 years or upon a change of control. In June
through August 2017, the maturity date of all of the Bridge Financing Notes was extended to January 15, 2018 in exchange for
the issuance of 25% additional warrants. The warrants have an exercise price of $0.03 and the same expiration date
(three years from original transaction) as the original warrants. In January 2018, the maturity date of all of the Bridge
Financing Notes was extended to April 16, 2018 in exchange for the issuance of 10% additional warrants. The warrants have an
exercise price of $0.10 and the same expiration date (three years from original transaction) as the original warrants. In June 2018, a majority of
the Bridge Note holders extended their notes to January 15, 2019, thus extending all the remaining Bridge Notes to this
date. The
fair value of the warrants were determined using the Black Scholes valuation model with the following key
assumptions:
The
fair value of the warrants were determined using the Black Scholes valuation model with the following key assumptions:
|
|
June
2016
|
|
|
July
2016
|
|
|
August
2016
|
|
|
November
2016
|
|
|
June
2017
|
|
|
July
2017
|
|
|
August
2017
|
|
|
|
January
2018
|
|
Warrants
Issued
|
|
12.9
million
|
|
|
10.0
million
|
|
|
3.3
million
|
|
|
1.7
million
|
|
|
3.2
million
|
|
|
2.5
million
|
|
|
1.25
million
|
|
|
|
2.8
Million
|
|
Stock
Price:
|
|
$
|
0.054
|
(1)
|
|
$
|
0.040
|
(1)
|
|
$
|
0.032
|
(1)
|
|
$
|
0.029
|
(1)
|
|
$
|
0.025
|
(1)
|
|
$
|
0.019
|
(1)
|
|
$
|
0.016
|
(1)
|
|
$
|
0.11
|
(1)
|
Exercise
Price
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
Term
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
3
years
|
|
|
|
2
years
|
|
|
|
2
years
|
|
|
|
2
years
|
|
|
|
1.5
years
|
|
Risk
Free Rate
|
|
|
.87
|
%
|
|
|
.80
|
%
|
|
|
.88
|
%
|
|
|
1.28
|
%
|
|
|
1.35
|
%
|
|
|
1.35
|
%
|
|
|
1.33
|
%
|
|
|
1.89%
|
|
Volatility
|
|
|
135
|
%
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
131
|
%
|
|
|
135
|
%
|
|
|
136
|
%
|
|
|
135
|
%
|
|
|
163%
|
|
|
(1)
|
Fair
market value on the date of agreement.
|
A summary of warrants, issued in conjunction with the Bridge Financing Notes and outstanding at September 30, 2018:
|
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Date
Issued
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Yrs)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
June
2016
|
|
$
|
0.03
|
|
|
|
12,566,667
|
|
|
|
.69
|
|
|
$
|
0.03
|
|
|
|
12,566,667
|
|
|
$
|
0.03
|
|
July
2016
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
|
.79
|
|
|
$
|
0.03
|
|
|
|
10,000,000
|
|
|
$
|
0.03
|
|
August
2016
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
|
.88
|
|
|
$
|
0.03
|
|
|
|
3,333,333
|
|
|
$
|
0.03
|
|
November
2016
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
|
1.13
|
|
|
$
|
0.03
|
|
|
|
1,666,667
|
|
|
$
|
0.03
|
|
June
2017
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
|
.69
|
|
|
$
|
0.03
|
|
|
|
3,141,667
|
|
|
$
|
0.03
|
|
July
2017
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
|
.79
|
|
|
$
|
0.03
|
|
|
|
2,500,000
|
|
|
$
|
0.03
|
|
August
2017
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
|
.88
|
|
|
$
|
0.03
|
|
|
|
833,333
|
|
|
$
|
0.03
|
|
August
2017
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
|
1.13
|
|
|
$
|
0.03
|
|
|
|
416,667
|
|
|
$
|
0.03
|
|
January
2018
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
|
.78
|
|
|
$
|
0.10
|
|
|
|
2,790,000
|
|
|
$
|
0.10
|
|
In
December 2016 and March 2017 the Company issued 500,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to
an investor as part of a financing transaction (see Financing Notes in Note 7). In December 2016 and March 2017 the Company
issued 550,000 and 1,100,000 warrants to purchase stock at $0.10 per share to an investor as part of a financing transaction
(see Financing Notes in Note 7). The warrants have a term of 5 years.
In
October 2017 and December 2017 the Company issued 1,000,000 and 1,000,000 shares of GulfSlope Energy stock, respectively to
an investor as part of a financing transaction (see Financing Notes in Note 7). In October 2017 and December 2017 the
Company issued 1,100,000 and 1,100,000 warrants to purchase stock at $0.10 per share to an investor as part of a
financing transaction (see Financing Notes in Note 7). The warrants have a term of 5 years.
A
summary of the Financing Note warrants, issued in conjunction with the Financing Notes and outstanding at September
30, 2018:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Remaining
Contractual Life (Yrs)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
|
3.25
|
|
|
$
|
0.10
|
|
|
|
550,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
3.46
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.04
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
|
4.21
|
|
|
$
|
0.10
|
|
|
|
1,100,000
|
|
|
$
|
0.10
|
|
Beginning
in August 2018, the Company began negotiating a capital raise which is expected to consist of the issuance of common shares and
warrants.
The specific terms of the capital raise have not been finalized including the number of
shares and warrants to be received by each investor.
Through September 30, 2018, approximately $970,000 has been received
from investors related to this capital raise
; however, the agreements have not been finalized, and no shares or equity
have been issued. As such, the funds received have been recorded as a liability on the balance sheet as of September 30, 2018.
In
September 2018, the Company issued approximately 4 million shares of common stock valued at approximately $231,000 on the date
of grant and 2 million warrants valued at $80,000 utilizing the Black Scholes model with an exercise price of $0.15 per share
in settlement of a liability for services rendered.
NOTE
10 – STOCK-BASED COMPENSATION
On
January 1, 2017, 33.5 million stock options were granted to employees, officers and directors of the Company. The CEO was not
included in the award. The stock options vested 50% on January 1, 2017 and 50% on January 1, 2018. The stock options are exercisable
for seven years from the original grant date of January 1, 2017, until January 1, 2024.
In
May 2018, 500,000 stock options were granted to an employee. In June 2018, 33.5 million stock options were granted to employees,
officers and directors of the Company. The CEO was not included in the award. Approximately 33% of the stock options vested on
June 1, 2018 and approximately 33% will vest on June 1, 2019 and 2020, respectively, provided that the option holder continues
to serve as an employee or director on the vesting date. The stock options are exercisable from the original grant date until
December 31, 2025.
Stock-based
compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the vesting
period. The Company recognized $1,857,531 and $653,669 in stock-based compensation expense for the years ended September 30, 2018
and 2017, respectively. A portion of these costs allocable to the Company’s exploration activities, $820,877 and $195,125
were capitalized to unproved properties and the remainder was recorded as general and administrative expenses, for the years ended
September 30, 2018 and 2017, respectively.
The
following table summarizes the Company’s stock option activity during the year ended September 30, 2018:
|
|
Number
of
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Average
Intrinsic Value
|
|
Outstanding at beginning
of period
|
|
|
35,500,000
|
|
|
$
|
0.033
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
68,000,000
|
|
|
|
0.075
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2 million
|
|
Vested and expected to vest
|
|
|
103,500,000
|
|
|
$
|
0.0605
|
|
|
|
3.32
|
|
|
$
|
1.2 million
|
|
Exercisable at end of period
|
|
|
54,500,000
|
|
|
$
|
0.0475
|
|
|
|
—
|
|
|
$
|
1.3 million
|
|
The
Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted. The weighted-average fair values
of stock options granted for the years ended September 30, 2018 and 2017 were based on the following assumptions at the
date of grant as follows:
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
145.2
|
%
|
|
|
127.2
|
%
|
Risk-free interest rate
|
|
|
2.7
|
%
|
|
|
1.71
|
%
|
Expected life of options
|
|
|
7 years
|
|
|
|
4 years
|
|
Weighted-average grant date fair value
|
|
$
|
0.065
|
|
|
$
|
0.022
|
|
The
Company used its historical stock trading price volatility for the last four years. The Company has no historical data regarding
the expected life of the options and therefore used the simplified method of calculating the expected life. The risk free rate
was calculated using the U.S. Treasury constant maturity rates similar to the expected life of the options, as published by the
Federal Reserve. The Company has no plans to declare any future dividends.
As
of September 30, 2018 there was $2.7 million of unrecognized stock-based compensation cost related to the stock option grants
expected to be amortized over a weighted average period of three years.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
From
time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course
of business. No legal proceedings, government actions, administrative actions, investigations or claims are currently pending
against us or involve the Company.
In
July 2018 the Company entered into a 39 month lease for approximately 5,000 square feet of office space in 4 Houston Center in
downtown Houston. Annual base rent is approximately $94 thousand for the first 18 months, increasing to approximately $97 thousand
and $99 thousand, respectively during the remaining term of the lease.
The
Company reached an agreement with a vendor in August 2018 for the settlement of approximately $1 million in debt. The vendor was
paid $150,000 in cash, future cash payments of $7,500 and 10 million shares of GulfSlope common stock. The agreement contains
a provision that upon the sale of the common stock if the original debt is not fully satisfied, full payment will be made, under
a mutually agreed payment plan. If the stock is sold for a gain any surplus in excess of $1.3 million shall be a credit against
future purchases from the vendor. The agreement was determined to meet the definition of a derivative in accordance with ASC 815.
At September 30, 2018 there is a fair value liability of $271,710.
NOTE
12 – SUBSEQUENT EVENTS
In
October 2018, the Company purchased an insurance policy for $159,995 and financed $146,310 of the premium by executing a note
payable.
In
October 2018, the Company paid the 80% lease bonus payment and the first year rentals in the amount of $139,809 and was awarded
Gulf of Mexico lease block Eugene Island, South Addition 371.
In
November 2018, the Company paid the 80% lease bonus payment and the first year rentals in the amount of $187,809 and was awarded
Gulf of Mexico lease block Vermillion, South Addition 376.